Kellton Tech Solutions Limited (519602) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Kellton Tech Solutions Limited's Q4 and FY '24 Earnings Conference Call. [Operator Instructions] I would like to thank you all for participating in the company's earnings call for the fourth quarter of financial year 2024. Before we begin, I would like to mention a short cautionary statement. Some of the statements made in today's con call may be forward-looking in nature, and such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Such statements are based on management's beliefs as well as assumptions made from the information currently available to the management. Audiences are cautioned not to place any undue reliance on these forward-looking statements in making any investment decisions. The purpose of today's earnings conference call is purely to educate and bring awareness about the company's fundamental business and financial quarter under review. Now I would like to introduce you to the management participating with us in today's earnings call. We have with us Mr. Niranjan Chintam, Chairman and Whole-time Director; Mr. Karanjit Singh, Chief Executive Officer, India; and Mr. Srinivas Potluri, Chief Executive Officer, U.S. I now hand the conference over to Mr. Niranjan Chintam. Thank you, and over to you, sir.

Thank you, Darwin. Welcome, everyone. Good evening, good morning, wherever you are dialing from. Thank you for joining our financial year closing numbers as well as Q4 of FY '24 results. Just want to run through some of the financial numbers first, and then we'll talk about the qualitative aspects of what we achieved in the year and what we achieved in this quarter. In the year, financial year 2024, we have a revenue of about INR 984 or INR 985 crores, which is 7.1% year-on-year growth. The company has received an EBITDA of about INR 106 crores and a net profit of INR 64 crores. So the EPS is INR 6.6 and the PAT margin is around 6.5%. For the quarter ending, we achieved a revenue of INR 248 crores, which is 1.1% quarter-on-quarter growth. The EBITDA is about INR 32 crores. And the margin -- EBITDA margin is about INR 13.2 crores (sic) [ 13.2% ] and the profit -- net profit stood at INR 23 crores. The PAT is about 9.6% for this quarter and EPS of INR 2.5 per share is what we [indiscernible]. The financial highlights and operational highlights, rather, as you are aware, we have notified that the exchange Zinnov Zones has again picked us up in the SME market in the leading quadrant, which only affirms a third party or affirming our capability, which is leading to some of our customer -- looking there, coming to us for some work to be done with them. We're also in the Challenger space when it comes to us on the Avasant's SAP S/4HANA Services in the 2024 in the Challenger market. We also have achieved about 7 new customers in this quarter. I will let -- once I'm done with that, Karanjit will explain the different customers that we acquired, and about 29 customers in this whole year. So with that, I want to hand over to Karanjit to talk about the customer acquisitions that we have made in the last quarter. Karanjit, can you speak about the customers briefly on what all markets that they're in and what is the work they're doing?

Sure. Thank you, Niranjan, and hello, everyone. So yes, as Niranjan mentioned, we have had 7 customer wins in this quarter, around range of industries types. We are -- we have won an engagement with a management consulting firm, where we are -- so -- where we are helping them with the application of AI for certain government processes -- grant processing that they do for one of their customers. So we are helping them implement the whole AI part of it, for which we are consulting with their customer. We've had a win with a large Indian pharma company, where they are trying to diversify into insurance -- health insurance, and we are helping them develop the digital presence over there. Similarly, we have been selected by a large Indian auto company, where we are helping them with building a digital collaboration and workflow tool to help streamline their R&D process and collaborate digitally because they have their centers that are spread all over. We have also been selected by a broadcasting media production house, which already sort of has an existing platform, but we are helping them refresh that platform with the latest technology and make it more scalable. We've also had a win where we're helping our customer implement the managed services, SAP implementation in life sciences space. So those are some of the wins, most of them are digital, but what is also encouraging and important for us are that some of these -- at least 2 or 3 of these are where we are working in the cutting edge area of AI to help them realize some of the benefits of generative AI in their business processes. Thank you. Over to you, Niranjan.

Thank you, Karanjit. So while Karanjit was talking about the AI, we have about 13 projects that we have launched for various customers in the AI, and they've gone live. These were successfully launched. We have a huge pipeline that is being built up in the AI space. So that is something that is exciting for us, and we are able to help our customers deploy AI-based solutions to cater towards their own customers or their internal means. Also, a couple of more highlights. During the last year using the success of FCI, HRMS solution, we were selected to do Karnataka state government HRMS platform that we are deploying. LIC has chosen us also to revamp their HR solution, so the whole -- from -- the whole life of an employee is going to be taken care of by us for both in the Karnataka state government -- all the employees in the state government as well as the LIC, every employee that is there, including the retirees, will be taken care of by us through our platform. So those are the -- we were successfully able to use our FCI learnings as well as our credibility to win these 2 new contracts, and we're very excited. We are deeply now into building a solution for them. Both of them are milestone-based contracts. So the revenue is going to be coming in very soon and then we'll start seeing the revenue showing up into the quarterly results. With that, I want to open up -- Darwin, can we open up for questions?

[Operator Instructions] We have the first question from the line of Gunit Singh from Counter Cyclical PMS.

Sir, so the current demand scenario in the IT industry was most from the guiding is that the spend on one part of customers are weak. And the demand is not as good as it used to be a couple of years back. So are we also facing any similar challenges right now? Or how does the market condition look to you? And what kind of outlook do we see for the coming years?

So good question, Gunit. Yes, we are in a similar boat as like others. Yes, there are some challenges. Spending has weakened. We are seeing early signs of recovery though. We are getting inquiries from our customers, specifically in the U.S. markets. Europe market is pretty much flat for us. Indian market is booming. I guess we are -- probably India is the best market in the world nowadays. So yes, the answer to your question is there are early signs of recovery, but we don't expect major recovery to happen until after the elections that take place in U.K. and U.S. So we are looking at probably the next 2 to 3 quarters. It is going to be slow growth and then probably starting the next calendar year is when you'll start seeing the spending coming back as aggressively as what it used to be. So at this point, right, my guidance would be that it will be a slow growth for this year with the growth coming back starting the calendar year next year.

All right. So when you mentioned slow growth, do you mean single -- low single-digit growth or something within the low double digit?

Naturally, it is a single-digit growth for this year. So that is how it's going to be for this year. Starting next year, right, calendar year, I'm using the calendar year term because U.S. elections will end. And then recovery starts, but it may not start until probably February, March of next year is when the recovery will start. That is what we are anticipating. So that is something...

Are we facing any pricing pressures also? Would we be able to maintain better margins? Or how does the condition look at that end?

So pricing pressures are not there at this point, while the pricing pressure is more to do with inflation of the wage than really anything else. The customers are not asking for such. It's just that even with the market -- the tight market that is there for demand, the employees are also -- have not -- the increments that they're demanding is not reduced dramatically. Yes, it has come down, but not to the extent that they are hoping for correction [ wise ].

So sir, are we hoping to maintain the margins this year?

Yes. Whatever we have for the whole year, we expected similar margins for the next year, yes.

All right. Sir, what is the current order book as on date?

So we have about 8 to 9 months’ worth of revenues that we have in backlog at this point.

All right. Got it. So we added 29 customers this year, so what is our total customer count?

Total customers?

Total number of customers that we have?

Let me get back to you on that in a while I take the other questions. I'll come back and answer that, Gunit. Okay. Let me just dig it out.

And we had guided about reaching $200 million in the next, I think, 2 to 3 years. So are we still on track for that or...

We still want to achieve that number, Gunit. What we anticipated the growth for this year, we have not been able to achieve because of the various headwinds that you are aware of, like the last year through this year while we wanted to be in the double-digit growth, we were able to achieve only the single-digit growth, which is unfortunate, but that's the nature of the market that we are in. And we're trying to swim with the market. And we have made some certain changes. We also have a few products that we have successfully be able to launch this year. And we are seeing early signs of revenue coming in from that. And we are anticipating that, that revenue also would be growing over the next few years to give us another line of revenue that's coming in.

The next question is from the line of Shah Nawaz, an individual investor.

So I think this year -- congratulations. I think this quarter was better than -- after so many quarters, this quarter has given a better or some kind of relief to us, right, so...

Thank you.

Sir, I think my previous colleague person -- investor has already asked a few questions. So I want to just know how much is the manpower you have because you're showing a drastic increase in the labor cost, INR 150 crores in this particular quarter, whether you have increased the manpower?

It's about flat, Shah Nawaz. It's the inflation of the wages that I was talking about is where the increase in costs have happened because of that and not because of anything else. And we were not able to pass on that increase in cost to our customers. I guess the bill rate is still the same, but the pay rates went up for us.

Okay. And -- so I think my -- the person had asked already, Mr. Gunit. He was asking that in 2024, '25, you have given the guideline in your annual report that $200 million is your aspiration?

We still, yes. We're still on and that's our aspirational number, and we want to achieve that.

So to do that in quarter minimum, you need to do INR 400 crores. But you are doing INR 248 crores. How this jump is going to happen? What is the tool? I mean, what is the product or something like you have something in pipeline, which is the [ best ]?

So there are some -- there -- like I said, right, we have some products that we have launched. A couple of them, we have launched and third one, we are still in the R&D phase of it. One is, I think we alluded to earlier, which was an industrial IoT solution that we have, and we are getting traction, we're getting revenue. Real customers coming in all the way from South America to North Africa, they are customers that are using our solution. And then we also have a hyper-automation tool. We have customers in India, U.S. and European markets. We're seeing some pipeline being built up. These are early revenues. We are probably in the $0.5 million range of revenue. But we anticipate, right, over the next 3 to 5 years, $20 million to $30 million revenue will be coming in from those products.

You have done some 100 -- some 11 customers, something is there. What is the revenue contribution of AI?

So again we -- I'll let Karanjit answer the question on the type of work we do, but the revenue is probably in the million-dollar range at this point because since early adopters, right? People are not spending multimillion dollars when it comes to AI-based projects. People are trying out small incremental bits, and we anticipate that over the next 1 year, this will go to a few million dollars. This is just experimental stage, everybody is curious, everybody is trying to see what can be done, what kind of efficiencies that can bring in, all that is being tried out now. So we are in that part of that learnings for the customers, helping the customers or educating the customers in identifying different, different use cases that they can use AI. So that when it comes to a larger entity, right, they should be able to adopt this using some of these concepts that we have developed and some of the use cases that they're using. Karanjit, do you want to add anything on top of that?

Yes. Yes, I can. So as Niranjan said, so there are certain early adopters. So like, there are 2 categories. There are these people who are trying to build out a new idea, start-ups kind of thing and then, of course, there are mature corporations, which are trying to leverage the power of AI. Most of these use cases for the -- fall into a couple of categories. So a lot of them tend to be in this whole intelligent chatbot, kind of a thing where they want us to basically look at the knowledge base that the company already has. And then use AI to kind of have whatever the intelligent chatbots or virtual , those kind of things, but there are also use cases around trying to automate tasks or gain insights. So like Niranjan earlier said, we've basically delivered a lot of AI projects already. But just to give you a little bit of flavor on that, like we built -- this is for somebody who is trying out a new idea. So we build a complete marketplace platform for subject matter experts. So essentially, we created the Digi Doubles. That's something that we have done or like there is a -- sorry, did you say anything?

Yes, to develop this AI product for you, how much do you have to spend in R&D already?

Yes, Niranjan, do you want to take that?

Yes.

Development costs. Yes. I mean, it might have been done 2, 3 years. So what would be the cost?

See, there is no real R&D as such, right? We are using internally to see the efficiencies. We can build efficiencies into our own delivery kind of stuff. So there are -- so the R&D mostly is done on the job with the customer, okay? So we are -- some use cases that we developed internally and then we say, hey, can we sell this to the customer? So it is going to be more of a sales-related expense. R&D than really a -- R&D and saying because we're not a product company that we are trying to do R&D spend on it. Here, we are developing use cases. So for helping our sales people to sell it. So that's something that there are some of our own customers, right? They have data -- and working with their customers and saying, hey, this is what the insights we can give you using the AI. Those kinds of stuff. So it's really not a significant amount of R&D or internal money that we are spending.

Okay. What is the manpower, sir, you have as of now, employee strength?

It is not -- we are flat what we were last year. Ups and downs were there. There'll be some people left, but we are back to 1,800.

Okay. Only 1,800.

Yes, correct.

Okay. What is the like plan for this year? Hiring is planned or...

At this point, we are keeping it fluid. We want to see how the demand. Based on the demand is what we would be increasing it. With that said, right, there a lot of interns that are coming in. We're working with them and any good interns that they're making offers to become our employees. So we are working with -- as we speak, right, in Hyderabad office, we have about 20-plus interns that are working on various different projects that we have given them. So if any good sharp people come out, we'd like to give them an offer. So they're working there. So based on the demand that we see from the customers is what we'll be hiring. I don't want to give out a prediction out at this point of, okay, we are going to be hiring this many number of people. But there are continuous hiring that is happening.

So $200 million in this year, you are saying you are still optimist, right?

Not this year. The next 2 to 3 years, which is what we said. Yes.

The next question is from the line of Rajesh S, an individual investor.

Hello, sir. So, first of all, congrats on another good quarter. And I have a few questions on the kind of another customer profile from the projects. So out of revenue of almost INR 1,000 crores, about what percentage would be kind of annuity projects or projects which are regularly ongoing? And what would be like coming from one-off projects?

Okay. So 80% of our revenue is from repeat, from the same customers, right? 20% is what new we get, typically. That has been our historical numbers, and that continues to be the historical thing. So to answer specifically on AMS. AMS part is -- probably 5% to 7% of revenue is AMS. We are not doing AMS like the large big boys. We don't do it. We support the projects that we have deployed, and we do what that patch, fix, upgrade, that kind of stuff we do, but not to the extent of having, let's say, a call center or a lights on, lights off kind of a thing. We are not doing it as an offering at this point, okay? But 80% is coming from the same customers for us, revenue-wise. It goes off year-on-year.